What does sharemarket turmoil tell us about our economy? Not a lot

 

By MILLIE MUROI, Economics Writer

When the Reserve Bank board walked into their two-day interest rate meeting in Sydney this week, most of their key numbers were locked in.

By the time they closed their laptops and zipped up their bags on Monday, the Australian sharemarket had shed close to $100 billion in one day: the biggest single-day drop since the pandemic came knocking. The Reserve Bank board “discussed it, obviously,” governor Michele Bullock told the media on Tuesday, but the turmoil didn’t play a role in the bank’s final decision to keep interest rates on hold.

So why didn’t the central bank care when panic swept across financial markets earlier this week? In short: because the sharemarket isn’t the economy – or a good indication of it. “It was a bit of an overreaction,” Bullock said. “It was one number.”

That number – a jump in the US unemployment rate – rattled investors because it signalled the world’s biggest economy could be closer to recession than people had thought. But why did it hit the Australian sharemarket so hard? And what does it tell us about our economy, if anything?

First, volatility in financial markets – where people buy and sell financial assets – doesn’t necessarily relate to the “real economy” with its goods, services and people. “Financial volatility does affect sentiment, and incentives for households and businesses to invest,” Bullock said at an address in her hometown of Armidale on Thursday. “But it isn’t the economy.”

Second, financial markets around the world have become increasingly intertwined. When something happens, especially in US markets, it’s certain to have a knock-on effect for Australia. And with so many large investors holding similar views, there was probably a “mechanical response” by markets, according to Westpac chief economist, and former RBA chief economist, Luci Ellis.

By that, she means a lot of people’s investment strategies changing course at the same time. “If large parts of financial market investors change their mind about the outlook for interest rates in the US, for example, they’ll all be trying to do the same thing at once,” she says.

There’s also a thing called “herd mentality bias” in finance, which refers to investors’ tendency to follow and copy what other investors are doing. A rhetorical question most of us get asked when we’re young and want to do something because our friends are, is: “if your friend jumped off a cliff, would you do the same?” When it comes to the sharemarket, the answer is often yes.

But this means when the tide starts to turn, there’s often a big shift in markets, with people hopping onto (or off) the bandwagon and copying what their peers are doing. As share prices start to fall, often the panic feeds on itself, and manifests in a big stock-selling frenzy, regardless of what started it.

It’s hard to pinpoint exactly what markets were thinking, and what factors fed into their reaction earlier this week. But the clear feeling sweeping through it was nervousness. When investors are nervous, they tend to sell shares, and move into “safer” investments such as bonds.

Does all this mean the Australian economy is in for an apocalypse? No, far from it.

When it comes to the fallout of the sharemarket plunge, there will probably be a slight impact on people’s wealth, at least over the short term, in what’s called the “wealth effect”. This is essentially the theory that people will tend to spend less when the value of their assets – such as their investments in the sharemarket – fall, and vice versa. The richer we feel, the more we’re likely to splurge.

But most Australian households don’t think too deeply about day-to-day movements in the sharemarket. A lot of our wealth, particularly when it comes to shares, are held in our superannuation funds, which most of us check on about as often as we change our tyres – only when we need to. And while the plummet this week may have caught our attention, we’re likely to have largely forgotten about it a few months down the line.

HSBC Australia chief economist Paul Bloxham points out it wasn’t just one number driving the movement.

On top of the weaker-than-expected jobs data from the US, there was also weaker manufacturing sentiment and Japan’s decision to hike interest rates, he says. Investors have been making the most of near-zero interest rates in Japan by borrowing money to invest in other countries such as the US: a strategy known as a “carry trade”. But the deadly combination of rising interest rates in Japan and signs of a slowing economy in the US suddenly made this trade unattractive, leading to a rapid pullback from these types of investments.

“When markets have a lot of participants all holding the same view, and it turns out that view isn’t right, when all of those people try to get out of that trade all at once, it can often be quite difficult, and you get more volatility,” he says.

While the Australian economy is closely connected to other countries, especially those in Asia, the choppy forces moving the Australian sharemarket often tend to be global.

By contrast, Bloxham says the biggest issue for the Australian economy remains inflation, which has become an increasing domestic issue.

“What matters more right now is that local inflation is still higher than it should be,” he says. “That matters more in terms of thinking about interest rates, and what it means for the local economy more generally, and that’s why the RBA is more focused on that than they are on the share market turmoil we’ve seen.”

To be clear, financial market movements can influence economic policy decisions from the RBA and the government, especially if they suggest there are problems around financial stability. During the global financial crisis, for example, the sharemarket crash reflected big losses in wealth and large numbers of people becoming financially distressed, which had a significant impact on the economic outlook. And a sluggish US economy would undoubtedly drag down overall global growth.

But sharemarket scares are frequent. And while the financial market, with all its fancy instruments can, on rare occasions, reflect the health of the economy, more often than not, it’s much ado about nothing. Don’t read too much into it.

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Why the customer doesn't always come first

The world is a complicated place. I have no doubt that the capitalist, market-based way of running an economy delivers the best results for workers and consumers. But that doesn’t mean companies never do bad things, nor that every business always does the right thing by its customers.

The father of modern economics, Adam Smith, famously said that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.

But, he argued, the “invisible hand” of “market forces” – the interaction of demand and supply in moving prices up and down – takes all the self-interest of businesses and the self-interest of consumers and turns them into businesses getting adequately rewarded for delivering just the right combination of goods and services to all the people in the economy.

There’s a huge amount of truth to that simple – if hard to believe – proposition. But it’s not the whole truth. One way to think of it is that, as Winston Churchill said of democracy, it’s the worst way of doing it – except for all the other ways. In this case, except for leaving all the decisions about what and how much to produce to the government.

So, to say capitalism is the best way of organising an economy isn’t to say it’s without fault. That it never does things badly.

In a speech this week, Rod Sims, the former chairman of the Australian Competition and Consumer Commission, but now a professor at the Australian National University, said that although companies regularly proclaim that they put their customers first, “companies clearly do not always have the interests of their customers in mind”.

So what are the reasons that, almost 250 years after Smith’s discovery, capitalism doesn’t always give consumers a good deal.

Sims can think of six reasons market forces don’t live up to their billing.

For a start, meeting customer needs may not be the main way companies increase their profits. Businesses are motivated to make profits and to increase those profits. But being the best at meeting the needs of customers isn’t the only way, or even the dominant way, firms succeed, Sims says.

For a firm to stay ahead of its rivals by continually improving its products and services is difficult. And eventually another firm works out how to do things better and cheaper than you.

“Commercial strategy therefore is largely about building defences against the forces of competition. To make it more difficult for other firms to develop a better product. Or, if they do, to limit their access to customers,” he says.

Another reason is that company executives are under considerable sharemarket pressure to increase short-term profits. Companies strive to grow because this attracts investors, the value of their shares rises and their top executives get bigger bonuses.

Sims says many companies set high growth targets to meet the expectations of the sharemarket. Often these targets are higher than the economy’s growth, meaning not all firms can meet or exceed market expectations.

So, in some cases, company executives see no alternative but to push the boundaries to achieve the targets they’ve been set.

That’s bad, but it becomes worse if the poor behaviour of a few causes normal competitive pressure to keep getting better than the others to reverse and become a race to the bottom.

Sims says that in well-functioning markets firms compete on their merits. Firms that offer what consumers value, displace firms that don’t. But the opposite can occur if poor behaviour goes undetected and unpunished, so it gives bad players a competitive edge.

“Firms can win customers through misrepresenting their offers and employing high-pressure selling tactics,” he says. As well as hurting consumers, such behaviour hurts rival firms, tempting them to protect their market share by employing the same questionable tactics.

Yet another problem occurs when firms see nothing wrong with what they’re doing, but their customers do. They (and economists) see nothing wrong with offering a better price – or interest rate – to new customers than they’re charging their existing customers.

But those older customers commonly react with outrage when they discover they’ve gone for years paying more than they needed to. They feel their loyalty has been abused.

Speaking of loyalty, Sims’ final explanation of why customers may be treated badly is that executives may feel their obligations to their company compel them to pursue profit to the maximum, even if their behaviour pushes too close to the boundaries of the law and isn’t the behaviour they would engage in privately.

So, what should be done about all these instances of “market failure” – where markets don’t deliver the wonderful benefits advertised by economists?

Sims has two remedies. First, as he argued strongly while boss of the competition and consumer commission, it needs stronger merger laws to help it prevent anti-competitive mergers. The courts require evidence about what will happen after a merger has occurred, but it’s hard for the commission to prove what hasn’t yet happened.

“The courts seem largely unwilling to accept commercial logic; that if you have market power you will use it. The courts can sometimes seem naive,” he says.

Second, we need a law against unfair practices, as they have in the United States, Britain and most of Europe.

“Our current laws are poorly suited to stopping behaviour ranging from online manipulation of consumers, to processors saying they will reject farm goods unless the prices agreed before the goods were shipped are now lowered.”

In the end, it’s simple. All the claims that capitalism will deliver a great deal for consumers are based on the assumption that businesses face stiff competition from other businesses to keep them in line.

But when too many markets are dominated by a few huge companies, service goes down and prices go up by more than they should.

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Too soon to say how hard virus will hit economy

To judge by the gyrations of the world’s sharemarkets, the coronavirus has us either off to hell in a handcart or the markets are panicking about something bad that’s happening, but they’re not sure what’s happening, how long it will last or how bad it will end up being. I’d go with the latter.

So would Reserve Bank deputy governor Dr Guy Debelle. He said in a speech this week that there’s been a large increase in the financial markets’ "risk aversion and uncertainty".

"The virus is going to have a material economic impact but it is not clear how large that will be. That makes it difficult for the market to reprice financial assets," he said.

That’s central-bankerspeak for "they’ve got no idea what will happen". Which is hardly surprising, since no one else has, either. More from Debelle’s speech as we go.

But understand this. Farr’s law of epidemics, developed in the mid-19th century, says that the number of cases of a new disease rises and then falls in a roughly symmetrical pattern, approximating a bell-shaped curve.

Depending on how quickly the disease spreads, the bell can have a steep rise and fall or a shallow one. Epidemiologists seek to make the bell as shallow as possible by slowing the disease’s spread. This allows the health system to avoid being overwhelmed – reducing the likelihood of panic and chaos, and making it more likely those who most need medical attention get it.

In theory, it allows more time for the development of a vaccine or useful drugs, but the World Health Organisation has said it will take about 18 months for a coronavirus vaccine to be widely available.

At this stage, the main way of slowing the spread is "social distancing" – reducing the contact between people by cancelling sporting events, closing schools or workplaces or ordering people to work at home. Of course, many people are doing their own social distancing by staying away from restaurants and bars.

The virus has now arrived in most countries. Its spread is well advanced in China, Iran, Italy and South Korea, but much less so in Singapore and Hong Kong, where the authorities got in earlier with their social distancing measures.

Such measures, however, cause considerable inconvenience, especially to parents, and disruption to the economy – both to the production of goods and, more particularly, services, and to their purchase and consumption. Not to mention the associated loss of income.

Some of this economic activity may merely be postponed – so that there’s a big catch-up once the epidemic subsides. But much of it – particularly the performance of services (if you miss a restaurant meal or a haircut you don’t catch up by having two) – will be lost forever.

Obviously, China is central to the story for both the world economy and ours. China’s economy was hit hard by the virus and the drastic but belated measures to slow its spread, though the number of cases does seem to have passed its peak and rapidly declined. Debelle said "the Chinese economy is now only gradually returning to normal. Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains."

The globalisation of the world economy in recent decades is a major part of the story of this virus. It means people in any part of the world are almost instantly informed about unusual things happening anywhere else in the world. It’s good to be better informed, but sometimes it can be frightening.

For another thing, globalisation has greatly increased the trade between countries, particularly trade in services, such as tourism and education. Trade in services has been greatly facilitated by the emergence of cheap air travel.

It’s all the overseas air travel everyone does these days that has caused epidemics that break out in one part of the world to spread around the world within a few weeks. More pandemics has become one of the big downsides of globalisation.

And when governments try to limit the spread of a virus by banning the entry of people from countries where the virus is known to have spread widely, this disrupts and damages those of that country’s industries who sell their services to foreign visitors.

(When the government stops you supplying a service to willing buyers, economists classify this as a shock to the "supply side" of the economy. When your sales fall because customers become more reluctant to buy whatever you’re selling, that’s a "demand-side shock" to the economy.)

Our imposition of a ban on non-residents entering Australia from China has hit our tourism industry and our universities. Debelle said that, since January, inbound airline capacity from China has fallen by 90 per cent. Until recently, he said, tourist arrivals from other countries had held up reasonably well, "but that may no longer be true".

The Reserve estimates that Australia’s services exports will decline by at least 10 per cent in the March quarter, roughly evenly split between tourism and education. Since services exports account for 5 per cent of gross domestic product, this suggests the travel ban will subtract 0.5 percentage points from whatever growth comes from other parts of the economy during the quarter.

Another consequence of growing globalisation is the emergence of "global supply chains" – the practice of multinational companies manufacturing the components of their products in different countries, before assembling them in one developing country and exporting them around the world.

China is at the heart of the supply chains for many products. So Debelle’s remark about the delay in repairing "the severe disruption to supply chains" is ominous. The Reserve’s business contacts tell it supply chain disruptions are already affecting the construction and retail industries – but there’s sure to be more of this "supply-side shock" to come.

And the shock to demand as - whether through virus-avoidance, necessity or uncertainty - consumers avoid spending money, has a long way to run. But, Debelle said, it’s "just too uncertain to assess the impact of the virus beyond the March quarter".

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The long run is now, and bills are arriving

It’s easy to take Keynes’ dictum that “in the long run we’re all dead” out of context. When you do, you can come badly unstuck - as the banks and insurance companies are discovering.

In case you’ve ever wondered, economists see the short term as being for a year or two, the medium term as about the next 10 years, and the long term as everything further away than that.

See the point? If the long run is only 10, 15, 20 years from now, you won’t be dead. Nor will most of the people around you at work. The economy will still be alive and kicking in 20 years’ time and, in all probability, so will your company.

In which case, spending too many years making short-sighted decisions could leave you looking pretty bad if you haven’t had the foresight to skip town.

For many years people have bemoaned “short-termism” – the tendency to favour quick results over longer-term consequences. To go for the flashy at the expense of patient investment in future performance. To do things where the benefits are upfront, and the costs much later, even when the initial appearance of success actually worsens the likely outcomes down the track.

Short-termism seems particularly to have infected big business. Listed companies are under considerable pressure to ensure every half-year profit is bigger than the last.

This pressure comes from the sharemarket, from “analysts”, but more particularly from institutional investors – the super funds, banks and insurance companies that manage the savings of ordinary people, invested mainly in company shares.

Although the “instos” don’t actually own many of the shares they control, they represent the shares’ ultimate owners (you and me) by continuously pressuring companies to get higher and higher profits – which will lead to ever-higher share prices.

It’s long been alleged that the short-termism the sharemarket forces on big business – to which companies have responded by trying to align executive pay with profits and the share price – has led firms to underinvest in projects with high risks or long payback periods.

If so, this fits with former senior econocrat Dr Mike Keating’s thesis that the advanced economies’ weak growth in activity, productivity and real wages is explained mainly by a protracted period of weak investment.

But the banking royal commission is a stark reminder to a lot of companies, the sharemarket and shareholders that after years of short-sighted, corner-cutting, even illegal behaviour, the long run has arrived, we’re all still alive and there are bills to be paid.

Those bills will take many forms. It’s likely some of the borderline customer-harming behaviour will become illegal, and so won’t be available to keep profits heading onward and upward every half-year.

Banks and insurance companies found to have mistreated their customers in ways that are outright illegal, will face big bills for restitution.

But probably the biggest bill comes under the heading of “reputational damage”. As Australian Competition and Consumer Commission boss Rod Sims reminded us in a speech, most companies spend much time and money promoting and protecting their “brand”.

A highly-regarded brand is money in the bank to the firm that owns it – as you see just by comparing the prices of branded and unbranded goods on a supermarket shelf. Brands engender trust – that the product is of consistently good quality and will do what it promises to do – and often social status.

But, as Sims says mildly, “bad behaviour by a company can undermine its brand reputation”.

“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”

Sure has. And that damage to AMP’s reputation and likely future profitability has seen its share price fall by 35 per cent since its first day in the witness box in April.

Sims says one way to discourage misbehaviour by companies is to “identify and shine a light on bad behaviour”.

“The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” he says.

Get it? The regulators are wising up, and in future will do more to name and shame offenders – to diminish brand reputation – so as to discourage short-sighted, take-no-thought-for-the-morrow behaviour. To move firms from the short run to the long run.

So far, the big four banks’ share prices have fallen only a per cent or two since the release of the commission’s interim report. But my guess is they have a lot further to fall once we see the full price they’ll be paying for past short-run profit-maximising behaviour, and how much less scope there’ll be for such behaviour “going forward”.

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Why it shouldn't be a bad year for our economy

Thanks for asking. Yes, I enjoyed my holiday – read some good books I'll tell you about later – but, unfortunately, didn't get far enough away from the media to avoid hearing all the gloomy news about the economy.

The Americans raised interest rates, the Chinese sharemarket fell, oil prices fell, share prices fell around the world, our dollar fell, the Chinese announced their economy was growing quite strongly, which everyone refused to believe.

Anything I've missed? Rarely has a year got off to such bad start, we were told. Might be worse than the global financial crisis, according to some guru whose name I forget. Recession will be knocking on our door, we're told.

Sorry, I'm not convinced. My guess is this won't be such a bad year for us, and next year will be quite good. Why? Because we've got a lot going for us domestically and because the bad things happening overseas won't have as much effect on our fortunes as many people have come to imagine.

It's become fashionable, particularly among our big business people, to take all the foreign economic news terribly seriously, on the assumption it has big implications for us Down Under.

I'm old enough to remember a time when most people believed that what happened to our economy was always of our own making. The Whitlam government tried to blame the recession of the mid-1970s on overseas factors, but everyone knew it was lying.

Since those far off-days, the world economy has globalised, of course, with the Hawke-Keating government doing much to open our economy to the rest of the world, particularly by floating our dollar and dismantling our protection against imports.

Another thing that's globalised is the media. When something bad happens anywhere in the world, we're told about it within an hour or two. Good news takes longer to pass on, if it gets through at all.

In the just-ended summer silly season, all the bad economic news from abroad has been a godsend to the parched local media, and we've played it for all it's worth.

But I think that, in adjusting to the globalised, joined-up world economy, we've gone too far the other way, assuming everything that happens overseas will determine our fate, that our economy is just a cork tossed on a global sea.

It's true that China's economy now has more influence on our future than the American or European economies we know more about, but even this can be overdone.

As can the media's extraordinary preoccupation with the ups and down of local and foreign sharemarkets, about which they – and we – know little. Hardly a news bulletin passes without us being told of the latest movement in the Dow, Footsie​ and Hang Seng.

The advent of compulsory superannuation saving has made our retirements more dependent on the fortunes of the sharemarket and, more to the point, made us more conscious of that dependency.

But sharemarkets have always gone up for a period and then down for a period, gone down for a while and then gone back up. Even during the market's long periods of seemingly steady rise, it's down on at least as many days as it's up.

So people who think they can learn anything useful about their affairs by listening to the nightly news to hear what happened to the market today – and then cursing when it's down – are fools. They've allowed the media to find a new way of making them feel bad.

Almost every economic event has advantages and disadvantages, producing winners and losers. When we allow a panicked global sharemarket and disaster-loving media to interpret those events for us, they soon convince us a fall in oil prices is bad news, not good, and the lower Aussie dollar is more bad news, even though it's what our economists have been praying for.

Perhaps our excessive attention to foreign news is fed by the widespread belief that countries make their living by selling things to other countries. So if other countries' economies are weak, our economy will be too, because they won't be buying much from us.

Fortunately, it ain't true. Or, to be accurate, it's 20 per cent right and 80 per cent wrong. It's true that Australians, like everyone else, make their living by producing goods and services and selling them to other people.

What's not true is that the other people have to be foreigners. Aussies will do just as well. About 20 per cent of what we produce is sold to foreigners, leaving a mere 80 per cent sold to locals.

That's why it's easy to exaggerate the effect that weak foreign demand for our goods and services will have on our economy. And the fact is that although prospects for the biggest export-oriented part of our economy – mining – are poor, the prospects for domestically oriented industries are good.

Unofficial estimates show the mining-related part of the economy is going backwards, whereas the "non-mining economy" has been growing at the healthy annual rate of about 3 per cent.

You see this in our figures for employment. Over the year to December, employment grew by more than 300,000 workers, a strong 2.7 per cent increase. The official rate of unemployment fell from 6.2 per cent to 5.8 per cent.

I'll be surprised if this steady improvement doesn't continue this year.

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Punters turn away from share investment

The return of the prudent consumer is being accompanied by the return of the risk-averse consumer. Households aren't only saving more of their incomes, they're saving more through banks and less through shares.

In the days when the public was less economically literate, many people had no conception of saving other than putting money in the "savings accounts" offered by banks. After a season in which we thought that was for mugs, saving through bank accounts is back.

In truth, the main way Australians saved was to take on a huge home mortgage, then pay it off over the next 25 or 30 years. By the time most people retired, most of their savings were embodied in the unencumbered value of their home.

And their outright ownership of their home was a big part of the reason they were able to scrape by happily enough on little but the age pension. Although the value of the pension has been rising in line with real wages for decades, ours is the first generation convinced it couldn't possibly live on the pension alone.

So it's probably just as well that, starting in the mid-1980s, employees have been compelled to save via superannuation. Super is now the chief rival to paying off a home loan as the main way Aussies save over their working lives.

Remember when John Howard was encouraging us to become "a nation of shareholders"? That was at a time when government-owned businesses such as the Commonwealth Bank and Telstra were being privatised and non-profit outfits such as AMP and the NRMA were being "demutualised", so many households acquired tiny shareholdings of this and that.

And, having taken the plunge, many then acquired shares in the more usual way. Well, owning shares directly is no longer fashionable. Of course, working households' indirect ownership of shares via superannuation increases as each pay day passes.

But, as the Reserve Bank observes in an article in last week's quarterly Bulletin, households have shifted their "portfolios" away from riskier financial assets, such as shares, and towards less risky assets, such as deposits. I'll be drawing from that article.

I've no doubt much of households' saving has taken the form of reducing debts and getting ahead on their mortgage repayments. There was a time when Aussies' highest financial goal was to repay the mortgage as early as possible. That goal is coming back into its own with the return of the prudent consumer.

I guess the chief motivation was a desire to be unencumbered but, as a tax-effective investment strategy, repaying the mortgage has always scored highly - exceeded only by negatively geared property or share investments.

Which brings us back to risk - and risk aversion. Between 2003 and 2007, the proportion of household financial assets held in shares (both directly and via super) increased from 35 per cent to 45 per cent.

Much of this increase came from capital gain. Total return on shares averaged about 20 per cent a year over this period, compared with average deposit rates of about 5 per cent. But then came the fall in wealth caused by the global financial crisis and the mild recession of 2008-09.

Between 2008 and 2011, there were net outflows from households' direct holdings of shares of $67 billion, while holdings of deposits rose by $225 billion.

It's likely people were reacting, on the one hand, to the large capital losses in the sharemarket, but also to the market's volatility, which has doubled since 2007.

But, on the other hand, people would have been reacting to the advent of much higher interest rates offered on bank term deposits as, in the aftermath of the global crisis, the banks bid up those rates in their competition to replace now-riskier overseas funding with more stable, "stickier" funding from domestic deposits.

Over the past 30 years, the average annual real return on Australian shares (including capital growth and dividends) has exceeded the average annual real return on deposits by about 5.5 percentage points.

Since 2008, however, that's been reversed, with a return on shares of minus 5 per cent versus 2.5 per cent on deposits.

The share of households' financial assets held directly in equities has more than halved from 18 per cent before the crisis to 8 per cent at the end of last year. In contrast, the share of deposits has increased from 18 per cent to 27 per cent.

That this shift has been driven mainly by households' greater aversion to risk is confirmed by the changed answers people are giving to relevant questions in the survey of consumer sentiment and other reputable surveys.

In theory, households have shifted to a less risky risk/return trade-off and, by doing so, are willing to live with lower returns over the longer term. But whether the "equity premium" - the much higher rate of return on shares relative to fixed-interest securities - will stay as high as it's been in the past is open to doubt.

The equity premium has always looked much healthier over long periods than it has over many shorter periods, meaning people in or approaching retirement shouldn't be too mesmerised by it and should be favouring more stable returns.

So the shift from shares to deposits may well be explained partly by the baby boomers' rapidly approaching retirement.

The big super funds have also shifted their mix away from shares to some extent, though they've done so by less than the self-managed super funds, suggesting they're more wedded to "equity" than they ought to be.

Why might that be? Well, part of the problem is that the dividend imputation system means share returns are more favourably taxed than fixed-interest returns. Not good.

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Sorry to be so sober. World not ending

At times like these, much of the media tends to cater to people who enjoy a good panic. The sky is falling and the proof is that billions have been wiped off the value of shares in just the past few days. Which makes me wonder how I've survived in the media for so many years. I hate panicking. So I'm always looking for contrary evidence. I just have hope there's a niche market of readers who prefer a sober assessment.

A bane of my working life is the way people imagine the state of the sharemarket to be far more important than it is in the workings of the economy. Our response to big falls in the sharemarket is based more on superstition than logical analysis, and a lot of people who should know better are happy to pander to the public's incomprehension.

We have a kind of race memory - a relic from the 1930s - that tells us a sharemarket crash is invariably followed by an economic slump. It ain't. As the Nobel-prize winning economist Paul Samuelson once quipped, ''the stockmarket has predicted nine of the past five recessions''.

Do you remember the crash of October 1987? No, probably not. There's no great reason to. It was the biggest fall on Wall Street since the Great Crash of 1929. People were panicking on that day in 1987 much as they are now.

A commentator senior to me predicted on page 1 it would lead to a global depression. In my comment - which was relegated to an inside page - I predicted no worse than a world recession. Fortunately, my thoughts were billed as ''The End Is Not Nigh''.

Turned out we were both way too pessimistic. What transpired? Precisely nothing. Neither in America nor here. In Australia the economy motored on for more than another two years before a combination of the subsequent commercial property boom and many more increases in the official interest rate finally brought us the recession we had to have.

The trouble with taking the sharemarket as your infallible guide to the economy's future is that the market itself is prone to panic. As its practitioners admit, its mood swings between greed and fear. Like all financial markets - and like the media - it acts in haste and repents at leisure. You can panic today because you can always change your mind tomorrow.

That's fine when onlookers don't take the market's antics too seriously. When they take its mood swings as authoritative, however, their reactions can cause those antics to have adverse effects on the ''real'' economy of spending and jobs that we inhabit.

In other words, what's important is not the ups and downs of the sharemarket, but the way we react to them.

In 1987, a lot of ordinary people who'd bought shares during the boom rushed out and sold them - thus buying high and selling low, precisely the opposite behaviour to the way you make money from shares. But the public soon shrugged off its anxiety and it wasn't long before the market recovered its lost ground.

Of course, a lot of things have changed since that great non-event of 1987. In those days, the link between the sharemarket and our daily lives was quite tenuous. These days, the link is much stronger thanks to the advent of compulsory superannuation - which has given most of us a fair stake in the sharemarket - and the baby boomers' proximity to retirement.

These days a sustained fall in share prices knocks a noticeable hole in people's retirement savings. That hole will refill in time, but who's to say how long it will take? Another difference with 1987 is that, this time, the sharemarkets in Wall Street and Europe really do have things worth worrying about. The American economy is quite weak and, although it's unlikely to drop back into recession unless Americans will it to, it's likely to stay pretty weak for the rest of the decade.

It's the Europeans who have by far the most to worry about, with so many heavily indebted governments locked into the euro and banks that are still in bad shape.

But yet another thing that's changed since 1987 is our economy's reorientation away from America and Europe towards China and the rest of Asia. Much of the fear that rises in our breasts on hearing of crashing sharemarkets is our unthinking conviction that what's bad for them must be bad for us.

It ain't so - not unless we unwittingly make it so. There never was a time when our economy was less dependent on the US and Europe than it is today. Well over half our exports go to Asia, with surprisingly small proportions going to the US and Europe.

It's true we're quite heavily dependent on China, but its problems are all in the opposite direction to those of the North Atlantic economies: it's growing too strongly and could use a bit of a slowdown. There never was a time when China was less dependent on the US and Europe than it is today. The notion that the world's second-largest economy lives or dies by its exports to the North Atlantic is silly.

But if all this is true, why does our sharemarket still take its lead from Wall Street? Because of its tendency to herd behaviour. By tacit agreement, what Wall Street's done overnight acts as a signal to all Australian players of the direction in which our market will be travelling.

What holds in the short term, however, shouldn't hold forever. Eventually, the price of a BHP Billiton share will reflect the profit-making prospects of BHP - and they're still very good.

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Economists part of Inside Job (Movie previews!)

It always takes the movie world a while to catch up with real life, but it's finally caught up with the global financial crisis. There's the Oscar-winning documentary Inside Job and a classic Hollywood job, The Company Men. I recommend both.

Inside Job deals with the origins of the crisis on Wall Street; The Company Men deals with consequences on Main Street from the resulting Great Recession. Let's start with the "real economy".

America's unemployment rate started rising in October 2008, reaching 10 per cent a year later. It's still about 9 per cent. Say it quickly and it doesn't sound too bad. People lose their jobs when the economy turns down - what else is new?

The great strength of The Company Men is the way it shows us what happens to the lives of three men who lose their jobs when their company decides to "rightsize". These aren't ordinary workers, they're executives close to the top of the tree, which gives them further to fall.

They are well-paid guys who seem to have committed themselves for almost all they earn. First is the humiliation of their lowly status at the outplacement agency and then the disillusionment as their repeated efforts to find another job get nowhere.

At first they attempt to conceal the shame of their unemployment from their children, neighbours and relations. Then comes the steady divestment of the big toys they can no longer afford. Marriages are strained by money worries. Their self-identity came from their job; their job is no more.

They were let go because their company's share price had fallen in the crash and something big must be done to restore it. But every company's share price fell, so what's the problem? The problem turns out to be the chief executive's need to raise the value of his share options. Whether on Main Street or Wall Street we see the new morality of corporate capitalism: look after No. 1 and don't feel any responsibility for the consequences of your actions for customers or colleagues.

In the words of one reviewer, Inside Job is the story of a crime without punishment. Wall Street's reckless behaviour caused the crisis and the huge damage it did to businesses, workers and retirement savings in America and Europe.

The banks were bailed out at great expense to the taxpayer, but so far almost no one has been punished for misconduct or negligence. Many of the perpetrators walked away with millions. The payment of outrageous bonuses hardly skipped a beat.

The film's graphics do a good job of explaining the central role - and the madness - of toxic derivatives such as collateralised debt obligations and credit default swaps.

Many of the docos you see on political and economic themes are acts of left-wing self-indulgence. Not this one. The sense of outrage it builds up in the audience is eminently justified. Indeed, it leaves you wondering how the American public has been so easily diverted from demanding Wall Street be brought to heel.

The outrage arises as you realise Wall Street is virtually a law unto itself. It was progressively deregulated at its own urging by congresses of both colours. Now its immense wealth and lobbying ability prevent it from being effectively reregulated.

For the most part, administrations' key economic regulators - Federal Reserve governors (Paul Volcker, Alan Greenspan) and Treasury secretaries (Robert Rubin, Hank Paulson, Tim Geithner) - come from the upper reaches of Wall Street.

When the big business-dominated Bush administration was replaced by the reformist Barack Obama, Republican-affiliated Wall Streeters were replaced by Democrat-affiliated Wall Streeters.

But it's not just the politicians who are compromised. The film's director, Charles Ferguson, shows how many of America's big-name academic economists are also on the Wall Street payroll. He outlined the case against economists in an article in The Chronicle of Higher Education. Ferguson's leading academic villain is Larry Summers of Harvard. He has long been a champion of privatisation and deregulation and as deputy secretary then secretary of the Treasury in the Clinton administration he oversaw the repeal of the Glass-Steagall Act, which had kept commercial banks separate from investment banks since the Depression.

Between 2001 and his entry into the Obama administration as director of the National Economic Council, Summers made more than $20 million through consulting and speaking engagements with financial firms.

Martin Feldstein, also of Harvard, a major architect of deregulation in the Reagan administration and president for 30 years of the non-government National Bureau of Economic Research, was on the board of the failed insurance giant, AIG, which paid him more than $6 million, and also on the board of the subsidiary whose dealings in credit default swaps brought the company down.

Feldstein's arrogant performance in the film was exceeded only by that of Glenn Hubbard, chairman of the Council of Economic Advisers in the Bush administration and dean of Columbia Business School. He's an adviser to many financial firms, resigning from the board of Capmark, a major commercial mortgage lender, shortly before its bankruptcy in 2009.

Frederic Mishkin, a professor at the Columbia Business School and a member of the Federal Reserve Board from 2006 to 2008, was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before Iceland blew up.

Laura Tyson, a professor at Berkeley and director of the National Economic Council in the Clinton administration, is on the board of Morgan Stanley, which pays her $350,000 a year.

Some of America's leading academic economists, from the most prestigious universities, make frequent pronouncements on public policy in the media, expecting to be venerated as disinterested experts. They rarely see a need to disclose their conflicts of interest.

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Stay calm, this too shall pass

Talk about a two-track economy. Have you noticed how the government and others have been focused on the return of the resources boom, with all the tax bonanzas and challenges that could bring, while the rest of the world has been worrying itself sick about the debt problems in Europe, sending our sharemarket and the Aussie dollar tumbling?

Surely the two don't fit. Are we living in fantasyland? Is reality about to hit us on the head? Or could it be that Europe's problems don't have all that much to do with us and before long the global financial markets will stop panicking and our share prices and currency will recover?

Standard product warning: no one knows what the future holds and economists aren't good at predicting it. But my guess is the end of our world isn't nigh.

Although the Greek government was in over its head even before the global financial crisis reached its peak in late 2008 (and was fudging its figures to hide the truth), most of the other European governments now have big budget deficits and huge levels of debt because of their efforts to rescue their banks and their heavy spending to stimulate their economies.

Those national governments with rocky banks (including the United States) have, in effect, transferred their banks' debt on to their own books. So what started as excessive private debt is now excessive public debt.

I don't criticise them for this. Had they not rescued their banks the outcome would have been a lot worse. No, the real problem is that, unlike us, their affairs weren't in order before the crisis. They'd been running budget deficits even in the boom years and had high levels of debt even before they were obliged to borrow so heavily.

The particularly acute problems in Greece served to draw the attention of the world financial markets to problems in other countries - Portugal, Spain, Italy and Ireland. Even the Brits have huge debt levels.

As often happens, the markets flipped from inattention to panic. When they're in that sort of mood, all the news is catastrophic. The Chinese had jammed on the brakes to burst a property bubble, putting an end to the global recovery. The Australians had nationalised their mining industry (something like that, anyway; not sure of the fine detail).

Whenever the players in world financial markets are gripped by panic their tendency is to sell whatever shares they can wherever they can and buy US Treasury bills. Even when it's the US economy that's at the heart of the problem, they still do it.

The result is a fall in sharemarkets around the world and a rise in the value of the US dollar at the expense of most other currencies. If you remember, this is what happened after the collapse of Lehman Brothers. Our dollar went from US98 in July 2008 to US63 in November. It stayed there until March, then eventually climbed back to US92.

The likelihood is that, as the present panic subsides, our share prices will recover and our dollar will go back up (as it has already begun to). But this return of the staggers is a reminder that a lot of the underlying problems exposed by the global financial crisis are still with us, and will be for a long time.

So perhaps the recovery of sharemarkets in the months following the crisis was a bit too optimistic and this time it won't be as strong.

Certainly, the Europeans won't easily dispense with their debt problems. And the more they feel pressured by the markets to turn around their budget balances by slashing government spending and raising taxes the more they'll slow the recovery in their economies.

The Europeans' problems are compounded by the existence of the euro currency arrangement, and their efforts to hold it together may end up extracting a high price in terms of economic growth. All the troubled member-countries would be better off being able to set their own interest rates and allow their own currency to fall against those of their stronger European trading partners, but

they can't.

The Greeks are so deeply in hock their best solution would be to default on their debt and start again, but that isn't possible. Even leaving the euro would be terribly messy.

So Europe isn't likely to show much growth for the rest of the decade. But this won't hold Australia back as much as it would have in the old days. Our fortunes are now much more aligned with those of China, India and the rest of developing Asia. Are they likely to be adversely affected by Europe's troubles? My guess is, a bit but not a lot.

China's efforts to deal with its property bubble are quite circumscribed, so I don't expect its growth to suffer too much. If so, our authorities' expectations of a return of the resources boom aren't likely to be too far astray.

The thing about financial markets is they make judgments in haste and repent at leisure. If it's right that the prospects for our economy haven't been greatly impaired by the problems of the Europeans and the fine-tuning of the Chinese, eventually our strong position relative to the other developed economies will again be reflected in our higher share prices and exchange rate.

As ever, the ups and downs of the sharemarket will prove an unreliable guide to the prospects for the economy (even though the innocent souls who write headlines sometimes seem to imagine the sharemarket is the economy).

Similarly, the headline-writers' assumption that a fall in our dollar is an unmitigated evil says more about their innocence of economics than their grip on reality.

On this I'm with our farmers, manufacturers, tourist operators and education industry in hoping the dollar's return to the 90s takes as long as possible. There's more to life than overseas holidays.

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